How heater manufacturers can improve the effectiveness of heaters.

Ever notice how your electricity bill tends to increase during the winter?  One of the major uses of electricity in the winter is for portable electric heaters.  In a typical situation, people will place the heater in a cold room that usually has a window and turn the heater on.  If the room is still cold, they will turn the heater higher.  What most people do not know is that if the heater is far away from the window, much of the heat from the heater can end up at the ceiling while the floor remains cold.  The reasons for this, is that cold air from the window falls while hot air from the heater rises creating a circulation pattern.  See the picture below:

As you can see, when the heater is placed away from the window, the ceiling is hot while the floor is cold.  To solve this problem, the heater should be place near the window.  The warm air from the heater will rise, be slightly cooled by the window, move across the ceiling and then fall down the opposite wall and heat the floor.  This sets up a natural circulation that evenly heats the room.  Architects know this and if you look at the placement of floor vents in a house or a hotel room you will notice that the heater is always placed below the window.  See picture below:

As the picture shows, the cold air near the window is heated before it enters the room and the air on the floor comes from the ceiling  rather than from the window.  Heater manufactures should use the Behavioral Science concept of Anchoring to recommend to customers where to place the heater for maximum comfort.  When people place a heater in the room, their first choice will be near the window based because of the labeling on the heater.  Today people are given no recommendations and the probability that the heater will end up near the window is low.

By anchoring people to the concept of placing heaters near windows, heater manufacturers can help customers heat a room evenly and reduce electricity use. This will ultimately reduce the overall cost of ownership of the heater as well as increase the perception of effectiveness of the heater.

Warning:  There should always be adequate space between a heater and any loose cloth like drapes.  Also not that this concept is not as applicable to heaters with fans.

Special thanks to Leura Greunke for the trigger for this concept.

How restaurants can increase the value of the food served.

Have you ever walked out of a restaurant after eating a great meal feeling physically tired and mentally slow?  The food may taste great but the large portions take a long time to digest.  On the other extreme is the diet menu.  Restaurants may display the low number of calories of an item but the selection may be lacking in taste.

How would you feel after eating this?

Customers must choose between meals that taste great but have consequences after the meal and items that are low in calories but may not taste as good.  If people do choose the healthier choices on the menu and lose weight, Self Attribution Bias from Behavioral Science tells us that people will never give the restaurant credit for the weight loss.

I propose that there is another option.  People are more likely to mentally enjoy a meal if there is a reward that is delivered in the short term.  In this case, restaurants could use the Behavioral Science concept of Framing and tell people how the food will make the patron feel a couple of hours after eating the meal.  While some foods make you fell tired and slow, other foods can make you mentally awake and energized.  To increase value to customers, some restaurants should focus on how you feel after a meal and then advertise those effects on the menu.  Instead of focusing on what the food does not have like calories, or cholesterol, the restaurant should focus on the short-term benefits the food provides.

Here is how it would work.  Imagine you are working in a law firm and you need to prepare for big court case the next day.  The menu would list several dishes that support brain function.  The meal could start with a walnut spinach salad, the main course would be salmon and desert could consist of blueberries.  Of course a couple on a date might opt for the aphrodisiac menu that includes oysters, shark fin soup and chocolate.  Mararthon runners would be offered a meal high in carbohydrates that would increase the storage of glycogen (or energy) in their muscles.  

Your mind would be sharp after this meal.

In summary, restaurants should design a menu that provides known benefits in the hours after consuming the meal and then advertise those benefits.  This will bridge the gap between food that tastes great but makes you feel terrible afterwards and food that is less appetizing but may provide benefits 20 years latter.  This will make people enjoy meals that may not have as much taste but have short-term health benefits.  It will also increase the value that restaurants offer to patrons by highlighting the food body relationship.

How Facebook or LinkedIn can help promote professional services.

One of the hardest decisions to make is choosing someone to perform a professional service such as a new dentist or elective surgery like Lasik.  Part of the reason for this is that we typically do not have much experience in the area.  We may only need the service once and after the service is done we lose interest in the subject.  If your new roof has a 25-year warranty, you will forget about it after the work is done.

Another reason that we have trouble choosing professional services like a plumber or painter is that it is hard to find someone in our network who has needed the same service.  Imagine that you want to find a painter.  First you have to identify your friends that live in a house, then you have to find someone that had their house painted recently.  The large amount of work that this takes and the low probability of finding someone in your region, makes this a complicated task.

Here is how the problem looks:

 

It is hard to find someone who is not in your immediate network.

Social network sites like LinkedIn and Facebook already provide the foundation to simplify the process of finding a professional service.

Here is how it would work.  Imagine that someone in your network recently hired a painter to paint their house.  This is not something that is normally discussed on the Wall at Facebook or in LinkedIn so you would not know who in your network had the work done.


The only way that you would find out if someone had worked with a painter is if you asked the person in your network directly.

Under the new system, Sam the painter would have a professional profile.  If Susan was happy with Sam’s work then she would provide a professional reference for Sam and add him to her professional services list.  This list would not take up space on Susan’s home page but if someone was looking for a painter, Facebook or LinkedIn would show everyone in their network who had recommended a painter.

 

Professional Services are now easy to find through your network.

The normal fan pages on Facebook would not be appropriate for a roofer since one would not want to get messages from a service that they may never need again in their life.  Similarly, I would not want to add a roofer as a friend because I don’t want to share my daily life with them.  In essence, professional services need a connection that is somewhere between a fan and a friend.

By promoting professional services, Facebook or LinkedIn would make it easier for someone to find a professional service by using their network.  Additionally, Behavioral Science proposes that the quality of the service will also improve because someone who has a large amount of positive references will subconsciously improve the quality of their work to match up with the references.  People who have poor references will not receive new work and will drop out of the network.

Added BonusUsing the above strategy will also increase advertising revenue for Facebook or LinkedIn by using targeted ad placement.  When someone searches for a roofer in their immediate network that person is ready to make an immediate purchase.  No one browses roofers for fun.  When a search is made in the network for roofers, Facebook or other social media sights can also post ads by third party roofers. These are target and timely ads and should command a high premium because of their relevance and timeliness.  The vast majority of advertising done in the Yellow Pages with the exception of restaurants falls into this category.

How banks can use Mental Accounting to help customers reach financial goals.

Many banks offer a variety of checking options for checking and savings accounts.  Some have higher interest rates if you use an ATM card and others have free online banking if you keep a minimum balance.  Unfortunately, many of these options provide little additional value for customers.  Most people have a single checking account that is used to pay for leisure activities and necessities and they must constantly make sure that they set aside money for bills that are due latter in the month.  If any money is left over, then it might get added to savings.

To improve value to customers, banks should use the Behavioral Science concept of Mental Accounting to offer accounts that are more in line with how people think about their money.

Most financial planners advise clients to prioritize spending so that the necessities in life like long term savings and housing are paid for first and whatever is left over can be used for less important things.  The banks should mimic this system.

Here is how the program would work:

First, you would define your repeating expenses such as rent and car payment, and then you define your financial goals.  Second, the bank would create multiple accounts with descriptive names such as Necessities, Savings and Leisure.

The Necessities account would only allow online banking payable to a fixed number of expenses, the Savings budget would be a savings account with limited access, and the Leisure would have ready access to cash in the form of a debit card.  When you deposit your paycheck each month, the bank would automatically make deposits into each account depending on your preferences.  A fixed amount would first go into the Necessities account, then another smaller fixed amount would go into the Savings account then whatever is left over would go into the Leisure account.

Under this plan, you could consistently spend all of the money in you leisure account and still be confident that you could pay your bills even if they were due several weeks after you receive your paycheck.  This system works because people spend based on what is in their account.  At the end of the month when your Leisure account is low, you would act like you were out of money yet still have confidence that you will reach your financial goals.

This program would shift the relationship between banks and their customers.  Today banks only offer security and convenience, which the customer views as a commodity.  By creating physical accounts that reflect people’s Mental Accounting and prioritizing deposits, banks can start to act as financial partners.  This would increase customer retention, reduce delinquency on mortgage and credit card payments and help customers reach their financial goals.

How online discount brokers can help investors get better returns.

When people buy stocks through an online brokerage, there is always the risk that the stock could lose value.  With the exception of day traders, most people are not watching a stock constantly.  Many times, normal investors may return to their account several days latter to see that the stock has decreased in price and their account has lost value.  One way to address this is through alerts.  If a stock reaches a set value, an email is sent.  Unfortunately, the investor may not get the email quick enough in order to make a sale to prevent further losses.  The other way to solve this problem is by using a stop loss.  With a stop loss, the investor sets the price where they want to sell and then they go on with their life. If the stock drops below the fixed price, the stock is sold automatically.

For many brokerages, setting the stop loss is a two-step process.  First you have to buy the stock then you have to enter a sell order as a stop loss.  If you only want to have 2% loss, you have to calculate the new sale price by hand.

To help customers minimize their losses, brokerages should use the Default Heuristic from Behavioral Finance to automatically set a stop loss.  When someone purchases a stock, a stop loss should be automatically set at a 2% loss.  This allows a little fluctuation after the stock is purchased but still limits the total loss to 2% plus transactions fees. Of course you can always remove the stop loss or change the price.

A 2% Stop Loss for Google

Automatically setting the stop loss prevents two major errors in Behavioral Finance, Loss Aversion and Disposition Effect.  Under Loss Aversion, people treat losses 2.5 times worse than a gain.  The stop loss will help minimize the feelings of loss.  The Disposition Effect states that people sell winners and keep losers hoping that the stock is bound to make up all of its losses.  Setting a stop loss will automatically sell the stock at a 2% loss avoiding the Disposition Effect.  Furthermore, this decision is made when the investor is making rational decisions because they are in a Cold Mood as described by Richard Thaler in his book “Nudge”.

This benefit can be taken one step further by increasing the strike price of the stop loss as the stock gains value.  If the stock increases by 3% from the original purchase price, then the stop loss should be reset at 1% above the purchase price (2% below the current price).  This will lock in any gains that the investor receives.  As the stock continues to increase in value, the stop loss would also continue to increase always trailing by 2%.  When the stop loss is triggered, the investor just needs to reevaluate whether they still want to be in that particular stock.  While a 1% gain does not sound like much, if that 1% was realized in only one month then the stock would have an effective annual interest rate of 8.7%

The Stop Loss automatically Increases with gains.

Using the Default Heuristic, online brokerages like E*Trade and Fidelity could minimize the losses for their customers while helping to lock in any gains.  If someone told me that the most I could lose on an investment is 2% but any gains that I received would be locked in, I would feel very confident about that investment.